Most online revenue is generated through the sale of soft goods and services, such as ad impressions, e-books, and premium memberships fees. E-commerce is the combination of traditional business models and new technology, allowing online stores to sell physical goods without maintaining a storefront.
While the concept of an e-commerce store is easy enough to grasp, the execution is very tough. Many niches within the e-commerce industry are extremely competitive, with razor-thin profit margins and a very high failure rate for new businesses.
Below we’ll highlight the five factors that determine whether an e-commerce venture will be successful or not. This is intended primarily for those who are new to e-commerce as a monetization technique, including publishers who are thinking of expanding to include physical goods as part of their business model. If you’re more experienced in e-commerce, check out our feature on 11 Experiments to Boost Your Conversion Rate.
Factor #1: Conversion Rate
Conversion rate is defined as the percentage of visitors to an e-commerce site that ultimately complete a transaction. So it’s then obvious that this metric is important in determining the success of an online store.
What probably isn’t quite so obvious is just how low conversion rates typically are. A general rule of thumb is that 2% to 3% of visitors will end up making a purchase, meaning that the vast majority of potential shoppers browse without ever making a purchase.
There are a number of different reasons why a potential customer would fail to convert. Some never even make it to looking at a product, while others place items into their cart, enter a shipping address, but then cancel right before pulling the trigger. Here’s a funnel visualization from UXMovement.com that we find useful in explaining the various opportunities to lose out on a potential sale:
In other words there are plenty of opportunities along the funnel for potential customers to drop off, including:
- Difficulty finding the product they’re looking for
- Difficulty getting enough information about the product to feel comfortable purchasing online
- Unwillingness to pay shipping costs
- Unwillingness to fill out all required personal information
- Technical errors at checkout / processing page
Factor #2: Acquisition Cost
Before an e-commerce site can even worry about converting a visitor to a customer, they have to think about how they can get that visitor on the site. A few larger e-commerce sites are big enough brands to receive some direct traffic. For example, plenty of online shoppers navigate directly to Amazon.com when they’re thinking about making a purchase. But if you’re operating Big Bob’s Online Poster Shop, you’re likely not getting a lot of type-in traffic from people who know your brand and come directly to you to buy their posters online.
Nor are most e-commerce sites likely to show up in relevant search results, especially for generic or competitive terms. E-commerce sites generally struggle to attract inbound links and search engine love, since they aren’t in the game of producing high quality content.
Instead, the general lack of meaningful free direct and organic search traffic means that most e-commerce sites have to pay to get visitors to their sites.
Try doing a Google search for a product you might buy online–for example “Nike tennis shoes” or “Fiestaware plates” or “multirotor copters”–and notice how many ads come up in the results. (Hint: it’s a lot!)
Most e-commerce sites acquire their traffic by bidding on relevant keywords with major search engines. For example, Zappos is clearly interested in getting anyone searching for “Nike tennis shoes” to its site, so it’s willing to pay to have its ad shown at the top of those results.
Given the general reliance on paid traffic, the efficiency with which an e-commerce site is able to buy relevant traffic is a critical factor. If more than 95% of visitors are going to leave a site empty-handed, you can’t afford to pay much to get them on your site in the first place. Yet the extreme competitiveness of many e-commerce niches means that cheap pay-per-click traffic is hard to come by.
To illustrate this point, here’s a look at some of the suggested CPC bids for a few random groups generated from Google AdWords’ Keyword Planner Tool:
- Women’s Tennis: $1.21
- Fiestaware: $0.99
- Inkjet Printer: $1.42
- Used Office Chair: $3.59
In other words, most high value e-commerce traffic is not cheap. Figuring out how to manage bids and target specific keywords efficiently is difficult, but potentially very rewarding if done correctly.
Many e-commerce sites spend a significant amount of their time figuring out the best ways to buy affordable traffic, and there are a number of tools dedicated to managing PPC campaigns for e-commerce sites.
Factor #3: Average Ticket Price
The more the average customer spends on your site, the more money your site will make.
That’s an obvious statement, but an important proposition for e-commerce sites to understand. We’ve already discussed that getting traffic to an e-commerce site is hard and expensive, and that the vast majority of that traffic turns out to be worthless.
So it’s imperative to make that sliver of visitors that actually converts as valuable as possible. The more they purchase during their visit, the more valuable they are.
There are obvious risks to simply jacking prices higher, especially as online shopping has been becoming more competitive from a pricing perspective. A more attractive outcome is increasing the number of items that end up in the virtual cart at checkout. While no one will complain about a single-item cart, the optimal customer is one who’s purchasing multiple items from your store.
That’s why sites like Amazon have started highlighting widgets that show related items other shoppers purchased along with the current item:
This works well because of the intelligence behind the suggestion. Amazon has thousands of items for sale, but it isn’t recommending them at random. In this case, the page for a dog house includes related pet accessories, as well as an option to add a couple items to the cart with a single click.
Assuming you’re running your eCommerce store on Magento you can take advantage of the MageMail extension which will not only help you upsell and cross-sell but also recover revenue from abandone carts, increasing the lifetime value of your customers.
Other sites make the suggestion of additional purchases even more prominent. Below is an example from Gap.com that gives a number of different suggestions for items that can be purchased along with the current one:
The suggestions of pre-selected combinations makes it easy for shoppers who were intending just to buy a pair of pants to expand their shopping trip and also include a shirt or backpack as well.
Adding another item has the same impact on your bottom line as going out and acquiring another customer–except that you don’t have to pay any of the aforementioned acquisition costs again.
Factor #4: Shipping Costs
Once upon a time, it was generally assumed that in exchange for the convenience of online shopping customers could expect to pay up for shipping. But that has changed pretty quickly as major e-commerce stores have introduced free (or cheap) shipping as a way to lure customers. The words “free shipping” have become increasingly common online:
And when shipping isn’t completely free, it’s generally cheap and easy to calculate:
As free shipping has become more and more common, the sticker shock of high shipping costs has become more painful. When presented with a sudden and significant increase in costs, online shoppers are likely to abandon the process and look for an option that includes free shipping.
For example, imagine finding a piece of art online for $189.99 that you like quite a bit. You add it to your cart, begin the checkout process, and then fill in some personal information. All of a sudden, this pops up:
The standard $25 shipping cost represents a 13% increase in costs. If you want it within a week, you’ll have to pay $60 for shipping (about 30% of the price tag).
Figuring out a cost efficient shipping solution is critical to the success of your e-commerce venture. In a Deloitte study from 2012, 71% of holiday shoppers said they were more likely to buy from retailers who offer free shipping.
There may be an opportunity to tie this factor in to the point above. Many sites offer free shipping for orders over a certain dollar amount, which can have the effect of driving up average order size. For example, if your site currently has an average order of $50, try introducing free shipping for orders over $75. That may drive more shoppers to throw in a couple extra items in order to save money.
You may also want to try offering free shipping on certain products, or during certain sale periods, and measure the impact on your conversion rate. That will give you valuable insight into how your specific audience responds to this bonus.
Factor #5: Loyalty
Given the difficulty in attracting visitors to your site and getting them to make a purchase once there, it makes sense that you’d want as much repeat business as possible. Shoppers who had a good experience with your site are more likely to come back and complete a second transaction, the Holy Grail for e-commerce sites.
If you don’t start thinking about how to make a loyal customer until after they’ve completed their purchase, it’s probably too late. They’re gone, and you have no real way to track them or encourage a repeat visit.
But if you plan ahead, there are more effective ways to encourage loyalty. For example, offering discounts in exchange for enrollment in a mailing list allows you to stay in touch with that customer (at the expense of a slightly smaller transaction now). Here’s an example of such an approach from Overstock.com, which runs a pop-up interstitial ad:
It’s also possible for e-commerce sites to track visitors to their sites in order to retarget them at a later date. This involves dropping a cookie on their machines that can be used to serve them ads at a later date.
This becomes a potentially effective way to keep acquisition costs down. Suppose you’ve cookied everyone who has browsed an office chair on your e-commerce site. Instead of paying a premium amount to advertise around searches for this term–recall from above that the suggested CPC here is $3.59–you can serve ads up to this segment elsewhere on the Web for a much cheaper rate.
There’s quite a bit to learn about retargeting in general and its applications to e-commerce in particular. Some good introductory reading includes:
- The Ultimate Guide to Retargeting Ads
- What is Internet-based retargeting, and how can marketers use it?
- A Beginner’s Guide to E-Commerce Retargeting
- 10 retargeting ideas for Ecommerce websites
The components of a successful e-commerce business are fairly easy to identify: you need to be able to acquire relevant traffic at an affordable price, convert them to customers at a decent rate, upsell wherever possible, and build loyalty that drives repeat business.
Of course, this is all much easier said than done; executing on the points highlighted above is extremely challenging.